In order to understand the relations the two government sponsored enterprises had with the housing market, it may be best to start with a little review of the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation's (FHLMC or Freddie Mac) historical background. It all started when Franklin D. Roosevelt's New Deal came into effect. The federal government established Fannie Mae in order to help reform the financial system during the Great Depression.

Fannie Mae's purchasing authority began with the Federal Housing Administration's (FHA's) insured mortgages. In 1944, it expanded to include loans guaranteed by the Veteran's Administration (VA). In 1968, the Vietnam War caused a strain in the national budget, which forced former president Lyndon B. Johnson to sign an amendment to Fannie Mae's Charter Act. This new Act was to free up space in the government's national budget by turning Fannie Mae into a private, shareholder-owned company. However, Fannie Mae was a government sponsored enterprise (GSE). This meant that Fannie Mae had the benefits of being privately owned, publicly traded, and operated by shareholders while also having the benefits of tax exemption and government support.

In 1970, Freddie Mac was established to control any further monopolization exercised by Fannie Mae. In the same year, Washington authorized the two GSEs to purchase conventional loans, which was comprised of prime and subprime loans. Prime mortgages were designed for borrowers with good credit who received lower interest rates and more affordable mortgage options. Subprime mortgages were offered to borrowers who had low credit scores and/or fit into the lower income bracket. Fannie Mae and Freddie Mac were designed to open opportunities for homeownership. Therefore, they needed to produce the business necessary to make homeownership affordable for borrowers. These two GSEs were not lending institutions and therefore did not lend money to borrowers directly. Instead, they provided funds to the lenders through their secondary market functions. The secondary market constitutes some of the highest buying authority with purchases being exchanged between lenders, banks, and savings institutions.

Foreign investors helped Fannie Mae and Freddie Mac receive the necessary funds for the U.S. Housing Market in exchange for the guarantee that the principal and interest will be paid back regardless of borrower defaults. The added comfort for foreign investors came from the government backing that these two GSEs had. Fannie Mae and Freddie Mac had written guidelines that set the limit for conforming loans. These guidelines were set to minimize the credit risk of borrowers, who went through a series of paperwork and qualification process in order to determine their likelihood of mortgage default.

How did Fannie Mae and Freddie Mac make money? They charged lenders who in turn charged the borrowers a guarantee fee on loans that it has securitized into mortgage-backed security bonds. In addition, Fannie Mae and Freddie Mac made their profits from the difference between the interest rate they charged the homeowners and the rate their investors charged them.

Subprime lending turned into an avenue of increased possibilities for the two GSEs. Higher risk borrowers meant higher rates charged. The higher the rates charged the less likely the borrowers were able to qualify. Therefore, programs that increased the borrower's ability to qualify became more available. Such programs included adjustable rate mortgages, balloon mortgages, interest-only mortgages, and increased amortization periods. The increased available programs produced more competition between these two mortgage giants. In the 1990s, these mortgage giants began their participation into subprime lending with A minus bond purchases. Over time, the competition within the subprime mortgages that were offered to high risk borrowers caused an increase in home values, which in turn caused an increase in equity available to borrowers. This led to equity liquidation, which provided temporary available funds for homeowners. Many high risk borrowers accepted adjustable or negatively amortizing programs in order for them to qualify for their mortgages. These programs made it temporarily affordable for borrowers to pay their mortgages. However, after a certain period of time (typically three to five years), the mortgage programs that were accepted by these borrowers forced them to find an alternative to their mortgage term as their mortgage's adjustable rate caused their payments to increase.

Today, subprime lending is almost nonexistent. Lesser programs have become available to borrowers who have had their equity reduced and debts increased. Increased delinquencies have caused lending institutions along with other mortgage giants to tighten their guidelines and minimize programs that were once created to increase homeownership across the country.

The GSE bonds backed with subprime loans caused quite a stir, not only in domestic markets, but in foreign markets as well. As of the end of March, approximately $1.5 trillion in securities were held by foreign investors. In September 7, 2008, the Federal announced their takeover of these two mortgage giants or GSEs. The following articles are some of the most common speculations made regarding this takeover:

"The most astonishing thing about Treasury Secretary Henry Paulson's plan for Fannie Mae and Freddie Mac is that he intends to use taxpayer funds to resuscitate the companies and return them to profitability." - The Wall Street Journal

This article notes very important information on Fannie Mae and Freddie Mac and their position as government-sponsored enterprises as well as what it means for the American homebuyers.

"Rather than marking the turning point that assures an economic recovery, the support that had to be provided to US mortgage giants Fannie Mae and Freddie Mac last weekend simply underlines the severity of the ongoing credit crisis." - The Irish Times

The bailout saves the lives of the mortgage giants and the housing market outlook is left for the next president to handle. How does the future of the U.S. economy look from this point?

"Seeking to head off any unloading of Fannie Mae and Freddie Mac bonds by Japanese investors, the U.S. Treasury Department is taking the unusual step of directly contacting Japanese financial institutions about the plan to rescue the mortgage giants, according to a published report." - MarketWatch

This is an example of how the U.S. handles a situation overseas regarding the mortgage giants' bailout.

"The speculation, cronyism and corruption that pervaded the operations of Fannie Mae and Freddie Mac are emblematic of the parasitism and criminality of America's ruling financial elite as a whole," the article's author, Bill Van Auken, asserts. The US financial elite has certainly not come out of this episode well, but the end of capitalism?" - The Australian

The corruption that takes place in the financial structure of Fannie Mae and Freddie Mac are noted along with the prime motivation of the bailout. Chinese economist Yu Yongding states "if the US Government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic. If it is not the end of the world, it is the end of the current international financial system."